World Bank helps Vietnam on transfer of natural disaster risks

The Vietnam Ministry of Finance and the World Bank in Vietnam, at a workshop on disaster risk finance and insurance, discussed the need for a financial protection strategy to better protect the country and its residents against the financial and social impacts of natural disasters.
During the workshop, which was held in Hanoi, Vietnam on November 15th 2016, a catastrophe risk model was unveiled, which showed that Vietnam is likely to experience, on average each year, $1.4 billion (VND 30.2 trillion) in physical damages from flooding, typhoons, and earthquake events.

According to the catastrophe risk model this suggests that there’s a 40% chance that Vietnam will incur damages above $6.7 billion (VND 141.2 trillion) from flooding, typhoons, and earthquakes, in the next 50 years. Furthermore, the World Bank explained that residential assets contribute 65% of total damage, while public assets contribute 11% of the total damage.

The numbers are vast, and in parts of the world like Vietnam, which are highly susceptible to natural disasters and also home to some of the poorest people in the world and have some of the lowest insurance penetration rates globally, the impact of natural catastrophes can seriously set-back any economic and societal progress.

In response, the World Bank and the Vietnam Ministry of Finance have discussed the need for a strategic financial protection scheme, that is designed to protect Vietnam’s citizens and financial structure against the costs of natural disasters, by utilising resilience measures, and enabling the utilisation of risk transfer solutions, such as insurance, reinsurance, and insurance-linked securities (ILS).

“Vietnam is one of the countries badly affected by natural hazards and climate change, resulting in heavy economic losses mostly to the poor. A strategic approach to improve the country’s resilience to such shocks will help safeguard livelihoods, and sustain its economic growth and development progress.

“Supporting the development of this strategy is part of the World Bank’s priorities in its engagement with the Government of Vietnam,” said Sebastian Eckardt, Lead Economist at the World Bank in Vietnam.

The catastrophe risk model, which was developed for the first time in Vietnam and of which the final model is to be delivered in December of this year, is an important step in the right direction for Vietnam’s efforts at reducing the impact of natural disasters and improving disaster resilience.

As explained by the World Bank, it enables the Vietnamese government to better assess the likelihood and severity of catastrophe events, and can also facilitate planning for the financial impacts of natural disasters before they actually take place, supporting increased preparedness and faster response times post-event.

“Establishing a financial system for risk management and disaster risk transfer is essential for Vietnam’s development. Insurance in particular would be an effective solution, not only to ease the burden on the state budget and transfer risks to international markets, but also help raise awareness about the importance of planning to mitigate the effects of climate hazards and natural disasters,” said Vice Minister Nguyễn Hữu Chí, of the Vietnam Ministry of Finance.

Innovative risk transfer solutions, says the World Bank, are in their infancy in Vietnam, and while the country’s government does currently rely on a number of different funding sources to cover the costs of disaster response and recovery, there remains a strong reliance on state budgets to provide the much needed funding post-event.

As noted by the Vietnam Ministry of Finance, insurance solutions are an effective and efficient way at improving the financial security of Vietnam in the face of increasingly severe and frequent natural disasters, and the threats of climate change.

However, as is the case with many emerging markets that are vulnerable to a range of catastrophe events, a lack of awareness of insurance solutions and limited, if any at all, spare income among the world’s poorest, means insurance still hasn’t reached those that need it most in many parts of the world.

As seen in parts of Africa and the Caribbean with both ARC and the CCRIF SPC, and also the Turkish Catastrophe Insurance Pool (TCIP), a combination of strategies, capacity and solutions from the insurance, reinsurance, and ILS space can increase the availability of affordable risk transfer solutions for the world’s most vulnerable and poorest.

Furthermore, the development of the catastrophe risk model for Vietnam should promote an increased understanding of the risks and the potential costs, which in turn should promote the creation of innovative & adequate solutions, and also build the comfort of investors and companies that look to operate in the region.

Participants at the workshop explored various options that the Vietnam government has to improve financial resilience, with the four main takeaways being; Developing a cost-effective financial protection strategy, making disaster risk finance an integral part of a broader disaster risk management and climate change plan, reviewing policy, legal, institutional and operational frameworks for the fund for natural disaster prevention and control, and recognising that the private sector is an essential partner.

Underserved regions such as Vietnam provide the insurance, reinsurance, and capital markets with a real opportunity to expand their presence and tap into new peril regions, while also doing good for society and improving both the pre-event preparedness and post-event recovery capabilities of vulnerable economies around the world.